Tuesday, 22 November 2016

The problem with political debate in Scotland is not that people aren’t well informed, it’s that the SNP ensure they’re very well misinformed.

It’s not a sophisticated strategy, but it seems to be an effective one. By using Twitter, official party representatives can basically get away with saying whatever they like by avoiding having to deal with pesky journalists who tend to like to check facts before they report them. On social media, complete lies can be read by tens of thousands of people before they’re exposed and debunked, by which time it’s too late. People seeking to give themselves permission to ignore awkward facts have been satisfied and the tweeter’s mission is accomplished.

Take the example of the Scottish Government’s own GERS figures. When these showed Scotland’s economy being a positive contributor to the UK, they were rightly quoted by the SNP as authoritative statistics. Since the figures started showing Scotland effectively receiving cash from the rest of the UK (roughly £1,700 for every man woman and child in Scotland last year1) the figures have instead been cynically and systematically undermined.

The SNP and their social media mouth-pieces have been so successful with their campaign of misinformation that, whenever GERS figures are debated now, the following points have to be endlessly repeated: there’s no missing whisky duty, there’s no missing export income, the figures aren’t affected by corporate head-office locations, London infrastructure costs aren’t allocated to Scotland and the figures are not guesswork compiled by HM Treasury, they’re qualified National Statistics compiled and published by the Scottish Government2.

The problem, of course, is that those who want the comfort of not facing economic reality simply choose not to listen to those who patiently debunk the myths. In a world where many proudly proclaim themselves to be climate change deniers, in Scotland we now have a growing army of GERS deniers.

But this strategy of spreading misinformation through social media isn’t limited to falsely undermining the GERS figures.

Now anybody with even a passing understanding of Scotland’s economy or the way our export statistics are calculated will know he’s making an extremely cack-handed attempt to mislead people here.

Export statistics are gathered based on the customer’s location3, so goods exported to the EU through an English port or freight-forwarder will correctly be recorded as EU exports (not rUK exports as Monaghan implies).

It’s also worth pointing out that no competent Scottish business would sell goods to an English customer for that customer to simply sell on to the EU without adding value. Factor in the knowledge that 56% of Scottish exports to the rest of the UK are services not physical goods4 and it’s clear that Monaghan’s 75% figure is complete balderdash5.

Of course it’s obvious why an SNP MP would want to falsely suggest that Scottish export figures to the UK are over-stated and those to the EU under-stated. One of the gaping holes in the SNP’s argument for Brexit as an independence trigger is the fact that Scotland sells more than four times as much to the rest of the UK as we do to the EU3. This means - if Brexit does turn out to mean UK/EU trade barriers exist - Scotland would risk damaging four times as much trade by ending up on the EU rather than the UK side of any such barriers.

So faced with a clear logical flaw in their argument, this SNP MP resorts to the tried and tested strategy of misrepresenting the facts and spreading misunderstanding. Unfortunately for Mr Monaghan, in doing so he exposes an embarrassing level of ignorance for all to see. Apart from showing that he doesn’t understand how export trade statistics work, he also shows he hasn’t even managed to read his own Government’s publication on the topic.

Well yes, they would have told him that by looking at the Scottish Government’s own “Export Statistics 2014” report where that information is found. If Monaghan had bothered to read this himself he would also have known that “just 44%” of Scotland’s manufacturing exports going to rUK is still 1.7 times more than go to the EU4.

You have to wonder: if independence is really such a good idea for Scotland’s economy, why do its supporters so consistently try to mislead us about the facts?

***

Notes1. for the simplest explanation of this, see The £9bn Fiscal Transfer2. if anybody still doubts any of these facts, please see this blog post > GERS Deniers3. see official Scottish Government website here which explains "Export Statistics Scotland (ESS) is based on the Global Connections Survey". I have filled in these forms so I know, but see actual form here and note wording of question 6;

4. These two simple tables provide an audit-trail between the figures in specified tables in the Export Statistics Scotland 2014 publication and the percentages and relative figures used in this blog (highlighted). The minor inconsistency in the tables included in the pdf were not significant enough to send me to the supporting excel tables.

5. When challenged to back-up his assertions Mr Monaghan claimed unspecified "academic research" and blocked me - at the time of writing he has still not offered further support for "his figures" which he ridiculously claims "suggest 75%" for rUK exports "destined for the EU"

Sunday, 20 November 2016

I spent this afternoon raking leaves and planting bulbs and all the while GERS and CRA figures were turning round in my head. I was bothered by the fact that base data errors in the "Beyond GERS" report published by Common Weal (see last blog post) were actually harming the case they were trying to make.

My interest has always been in trying to ensure debates around Scotland's future are based on a sound understanding of the data, so - recognising that this helps those trying to use the "Beyond GERS" report to argue for independence - I feel duty-bound to offer the following correction.

In essence the author of "Beyond GERS" has made two mistakes.

The first mistake made is to use 2014/15 data for identifiable spend instead of 2015/16 data - this leads to an understatement of costs of £1.1bn.

The second mistake made is to double-count Scotland's share of the UK's overseas spend - this leads to an overstatement of costs by £2.4bn.

The net effect is therefore a £1.3bn overstatement of Scotland's base costs (before heroically optimistic savings assumptions are applied by the report's author).

The following table offers the simplest audit-trail of this I could manage. The first two columns are actual GERS figures and the fifth column (ho ho) is the middle case as presented by "Beyond GERS". I've broken out the rows needed to explain how GERS and Beyond GERS figures are related - hopefully this is helpful.

To get to these figures I needed to reconcile the GERS figures with the CRA data for the last two years. It's an interesting exercise (if you like this sort of thing) so I share the analysis below

The 1st column is Scotland's identifiable spend per CRA

The 2nd & 3rd are UK total overseas and non-identifiable spend by category per CRA

The 4th column is a Scotland's simple population share of overseas and non-identifiable spend

The 5th column is the difference between the 1st and 4th columns and the last column (which is the figures as shown in GERS)

Basically what this table shows is the "value-added" of the Scottish Government's statisticians in preparing GERS - the 5th column is the adjustments made versus simply using CRA data and taking a population share of overseas1 and non-identifiable1 spend.

So in 2015-16 these adjustments served to reduce Scotland's attributed spending by £1bn. If you read GERS you'll find these adjustments explained - I'm not going to attempt audit-trail them all here (this is my Sunday evening after all).

Of course when the 2015-16 GERS report was published the Scottish Government was relying on estimates of CRA data - so for completeness here's the same table for 2014-15. Again the net affect of the Scottish Government statisticians' adjustments was to reduce Scotland's attributed spending by £1bn.

Note
1. In compiling this audit trail I stumbled across something I confess I haven't been able to explain. In the CRA report, page 13 Table A.1 the figures for total "Outside UK" and "Non-Identifiable Expenditure" differ from the sum of those figures in tables A.5 to A.15 (the figures by spend category do reconcile between tabe A.1 and tables A.5 to A.15). I'm sure I'm missing something obvious - any help would be gratefully received

Saturday, 19 November 2016

This front-page splash and supporting article in the Nat Onal caused a great deal of excitement among dogmatic proponents of Scottish independence.

It's no surprise that the article itself was the usual garbled nonsense; the Nat Onal know their readers, so the report was spun as a GERS denier's wet dream

They describe it as "a new model aimed at replacing GERS figures" (it isn't, it's an attempt to predict Scotland's possible stand-alone finances, something GERS has never claimed to do)

They refer to "modest and conservative" calculations (which we'll see are anything but)

They offer this quote from Common Weal Director Robin McAlpine: "With this report we think we’ve reached deficit parity with the rest of the UK without cuts to anything other than defence." (which is - to be kind - a creative summary of the report's conclusions)

But those Nationalists who bother to read the report itself (published on the Common Weal website here) will - if they have any critical faculties intact - find themselves bitterly disappointed. I recommend anybody interested in the debate around Scottish Independence to read the report in full and - noting that it's written by an avowedly pro-independence author - ponder what it tells us.

So what does the report actually say?

Well let's start by applauding the author's intention. Some of us have spent the last few years patiently1 making the following point about GERS

"Nobody is arguing that an independent Scotland wouldn't want to and indeed have to do things differently - but GERS does show us the starting point, the run-rate, the pro-forma accounts on which an independence case needs to be built. Those who champion independence have to make a credible for case for how and why and by how much we'd change the GERS figures by being independent. Just saying "the GERS figures tell us nothing" simply doesn't wash - they tell us what happens if we were to keep taxing and spending at these levels (and why we can't)." - Chokkablog August 20161

Regular readers of this blog will know that the GERS figures show Scotland received an effective c.£9bn fiscal transfer from the rest of the UK in 2015-16.

The Beyond GERS report validates this analysis by recognising that - just to get to "deficit parity" with the rest of the UK - we would need to find £9bn through some combination of savings to the costs and increases to the tax revenues shown in GERS. The author has - to his credit - accepted this challenge and had a go at addressing it.

As an side: we should also applaud how "Beyond GERS" handles tax revenues:

"the starting point is taken to be the latest figure of £53.748 billion extimated by GERS in 2015-16"

Hallelujah! No nonsense about missing VAT revenues or whisky duty, no confusion about export revenues, no erroneous suggestions that corporate head-office locations affect the figures or that HM Treasury is suppressing our tax figures by withholding data. Props are due to Fraser Whyte and Neil Lovatt for their consistent work rebutting these myths - maybe it does make a difference after all?
Business people are often faced with strategic decisions which are hard to robustly quantify. In those situations a useful approach is to work out "what would you need to believe would happen" for a decision to make sense. "Beyond GERS" offers us just such an analysis.

So - remembering that the Nat Onal calls these "modest and conservative" assumptions - here's what Beyond GERS suggests3 we would need to believe would happen for independence to make economic sense

We would save £1.7bn by walking away from 61% of our population share of the UK's debtand

We would save £3.5bn by persuading the rest of the UK to pick up 38% of our pension billand

We could cut our defence spending by £1.0bn (as opposed to the £0.6bn saving assumed in the White Paper)and

We could raise an additional £3.5bn of tax (equivalent to a 29% increase in our total income tax take)and

We could raise £0.7bn of revenue through "government re-organisation"and

There would be no economic downside due to separation from our largest export market and the need to create our own currency

Anybody who reads that list and thinks "yeah, that seems like a reasonable set of assumptions", do please get in touch - I want to sell you things.

There are lots of issues with the detail of the report as it attempts to justify the above list. If it's not obvious to you why these assumption are at best heroically optimistic, most of the reasons are covered by Neil Lovat's excellent blog post here (which saves me a lot of time).

The base data he uses is all over the place. He uses a mix of 14/15 and 15/16 cost data which means he understates identifiable costs by £1.1bn and the accounting adjustment by £0.7bn - but this is more than balanced by the fact that (presumably because he's misunderstood the data) he's actually over-stated "other non-identifiable" and "overseas costs" by more than £2bn4.

** Addendum: I've taken the time to fully reconcile GERS, CRA and "Beyond GERS" here (it shows that the net effect is that "Beyond GERS" atually overstates Scotland's base costs by £1.3bn) **

But let's finish with the positive: I wouldn't go so far as to say the pace is glacial - it's maybe more akin to the speed of continental drift - but this paper does shows that the debate is gradually moving forward. The author has accepted the existence of the £9bn deficit gap and tried to make some assumptions to close it. In the process he has - perhaps unwittingly - provided a compelling illustration of the scale of the problem supporters of independence face.

************

Notes
1. Well, mostly
2. I really have been very consistent about this - the following from this year alone

"Nobody is arguing that things would remain the same. Those of us who argue for rational debate simply ask for those making the case for independence to actually explain coherently what the different "economic strategy" would actually be and provide a realistic assessment of how (and by how much) it would change the figures compared to those of Scotland being within the UK." - Chokkablog August 2016

"We should be very clear about what this analysis of historical fiscal data can and cannot tell us. The figures only tell us how an independent Scotland’s finances would have looked if we had already been independent but were still raising taxes and incurring public spending (including reserved expenditure) as we have been as an integral part of the UK. We are looking at what in financial accounting terms would be considered pro-forma accounts. The figures do not tell us what the future accounts of an independent Scotland would look like. They do however describe the starting point (the “run-rate”) from where we can start to consider the possible impact and fiscal implications of independence." - Chokkablog March 2016

"All I have been attempting to do is ensure we have clarity around our starting point. Were we to be independent or fiscally autonomous now, what would our pro-forma accounts look like? What is our economy's run-rate? This frames the debate, shows the size of the challenge. If we are all honest about this starting point then maybe we can have an interesting and constructive debate" - Chokkablog June 2016

"This onshore deficit gap matters because it is revealed - it becomes real - as oil revenues decline. This is not to say that were Scotland to be independent this gap would remain; it might narrow, it might widen. It merely gives us an idea of the run-rate relative disadvantage we would be starting with if we sacrificed the benefits of UK-wide pooling and sharing (assuming the days of significant oil revenues are indeed behind us). If you like, it's the head-start we'd be giving to the rest of the UK." - Chokkablog February 2016

3. The table below shows the audit-trail I've used to understand how the "Beyond GERS" middle case compares to actual GERS figures.

The 2015-16 GERS figures were (for the first time) produced before the CRA data were published. These data now exist (as detailed in my last blog post here) so I have assumed identified expenditure in GERS = now available CRA data (in reality I expect GERS 2015-16 figures will be restated to reflect these actuals, so this is a source of likely reconciliation error)

At first look I don't understand why Beyond GERS has such a big figure for "other non-identifiable". This could possibly be due to PESA/CRA differences, but even netting the grey "opaque" figures off against each other I see £1.3bn of cost in Beyond GERS that I can't explain.

Frankly I don't think it's worth my time to go any further explaining and reconciling somebody else's figure

*** ADDENDUM ***
4.

I couldn't let it lie - I hate being me.

So ... Beyond GERS uses 14/15 cost data from PESA (see page 158) and 15/16 revenue data from GERS - which is simply wrong. The 14/15 identifiable cost data in PESA he uses matches the 14/15 identifiable cost data in CRA (see page 15). The 15/16 cost data in CRA (which he should be using, although to be fair it's only just published) is £1.1bn higher (per my table above).

So he starts off £1.1bn low on costs.

He uses the GERS accounting adjustment for 15/16 and applies it to 14/15 cost data - again this is simply wrong. The accounting adjustment in 14/15 was £4.6bn versus the £3.9bn he uses.

So he's another £0.7bn low on costs there.
I think this is incompetence on the author's part (rather than an active attempt to deceive) because his £2.35bn on "other non-identifiable" looks awfully like a double-count to me (i.e. it's costs that are already attributed to Scotland in the CRA analysis). If not he's suggesting GERS is £2.2bn light on costs! So he seems to have double-counted £2.2bn of costs.

I've tried to be polite and constructive throughout this blog post - so let's just say the report's intentions may be admirable, the analysis less so

This is of course not news. In a post-indyref world, surely most Scots are aware that Scotland enjoys higher public spending than the average of the rest of the UK?

Regular readers of this blog will know there are nuances aplenty and some caveats needed (which we'll come to) - but the simple maths is easy to follow: £1,500 per person higher spending on 5m people = £7.5bn. That's the lion's share of the current c.£9bn effective fiscal transfer Scotland receives from the rest of the UK - so the transfer is largely explained by the fact that we spend more, not that we generate less.

Those who react to observations about the scale of Scotland's notional* higher deficit (and the resultant fiscal transfer from rUK) with "this just proves we suffer under mismanagement from Westminster" have overlooked this very simple fact: we have a bigger deficit because we enjoy higher levels of public spending. These are levels of public spending that (as I frequently tire of pointing out) would be simply unsustainable without either ongoing fiscal transfers from the rest of the UK or - were we to be independent - new windfall revenues (like another oil boom) or decades of spectacular economic growth.

* notional, because the whole point of being in the UK is that this deficit doesn't actually exist - Scotland's spending doesn't have to be met by Scotland's tax revenues and our population share of the UK debt alone, we get to pool and shares across the UK (if you like, this support for our higher spending now is merely fair reciprocation for sharing "our" oil revenues in the 1980s)

So few people should be surprised to hear that Scotland has relatively high levels of public spending. The absolute size of the difference may, however, cause raised eyebrows among that small cluster of people who are familiar with the Scottish Government's own Government Expenditure and Revenue Scotland (GERS) figures

GERS 2015-16 showed Scotland having £1,2141 per head higher Total Managed Expenditure (TME) than the UK average

This CRA report shows Scotland having £1,4602 per head higher Identifiable Expenditure

That's a difference of £250 per capita or £1.3bn - so not an insignificant amount.

There are a few factors that can explain the difference ;

The CRA headlines are based on identifiable expenditure only - but given the vast majority of non-identifiable spend is allocated in GERS on a per capita basis, it seems unlikely that this would explain the difference3

Timing: by publishing GERS earlier than in previous years, the Scottish Government had to rely on their own estimates and analysis rather than using the published CRA figures as they were able to in prior years4. We'll probably have to wait to see how the GERS 2015-16 figures are restated in the 2016-17 publication to find out the extent to which this led to inaccuracies.

Methodology: the Scottish Government make various adjustments to the CRA spending data when compiling GERS - for a combination of technical and/or judgement-based reasons5.

I haven't fully reconciled the figures - life's too short - but overall it seems like overall identifiable expenditure matches reasonably well between Scottish Government GERS and the CRA report - with a net difference of only about £90 per capita (with higher spend in the CRA analysis)6. We'll use the detail of this analysis to apply caveats below - read the note if you really want to follow the data trail or just trust me; it's up to you.

The balance of the difference between GERS and CRA (£160 per capita) must be explained somewhere among the world of pain that is "accounting adjustments" - we'll leave those for another day8.
So armed with the above knowledge and caveats, here's what the CRA analysis shows us.

First of all there's the age-old question of whether we compare our spend per capita with UK average (including Scotland) or with the rest of the UK (rUK). Personally I find it easier to think in "vs rUK" terms, on which basis our (CRA analysed) spend is in fact about £1,600 higher.

As an aside: those who think that HM Treasury are always spinning against Scotland might ask themselves: if that's the case, why they don't use "versus rUK" comparisons for their press-releases?
Looking at the breakdown by spend type in the table below it's clear Scotland spends more than the UK average in all spend categories (as we have aleady observed through the GERS figures in blogs passim).

Figures we can trust: materially consistent between CRA and GERSThe £ figures in these bullet points are how much higher Scottish annual spend per capita is than the rest of the UK, the percentage is that figure vs the rUK per capita spend

It's pretty straightforward really - even with caveats around methodology and even if we accept the (kinder on Scotland) Scottish Government GERS assumptions - Scotland, as it's governed today, is an expensive country to run.

The extent to which this relative high cost is a structural issue (remote and island communities, demographics that mean a relatively high dependency ratio, areas of chronic deprivation etc.) or are a result of a Scottish Government that's keen to spend the Barnett Formula money on freebies that win votes (no tuition fees, free prescriptions, scrapped tolls etc.) is a debate that will run and run.

This analysis is a timely reminder that there would be one easy way for the SNP to further the cause of Nationalism: they could ask for the fiscal framework to be scrapped so that Scots could get used to the lower public spending we'd need to endure while we waited for the miracle of independence to produce exceptional economic growth ...

3. The three largest non-identifiable spend areas are public sector debt interest, defence and international services. Between them these account for more than 80% of non-identifiable expenditure. All of these (and many others) are allocated to Scotland in GERS on a per capita basis (they therefore can't explain any per capita spend difference between Scotland and the UK average)

4. GERS page 25:

"This edition of GERS sees a change in methodology to allow earlier estimates of expenditure to be produced. Whilst expenditure for years prior to 2014-15 continues to be based on the CRA, the 2015-16 estimate is primarily based on data from the Scottish Government accounts system combined with data from HM Treasury‟s Public Expenditure Statistical Analyses"

1. Public sector debt interestIn 2015-16, UK public sector debt interest includes expenditure associated with English Housing Associations. Scotland is allocated none of this expenditure in GERS. This decreases the Scottish share of HM Treasury current expenditure on public sector debt interest.

2. Network RailIn 2015-16, spending by Network Rail has been moved from an accounting adjustment into TES. The shares from GERS 2014-15 will not reflect this spending. Spending associated with Network Rail has therefore been added into Scottish spend estimates. This increases the Scottish share of Department for Transport current and capital spending on transport.

3. Social protection expenditureScottish social protection expenditure by the Department for Work and Pensions and HMRC is estimated directly, rather than apportioning shares of the UK total. Spending by the Department for Work and Pensions is estimated based on data from the tabulation tool and UK spending data. Spending by HMRC is based on HMRC spending data and HMRC geographical award statistics."

6.

7. GERS page 2.

"The ONS reclassified English Housing Associations (HAs) into the public sector on 30 October 2015. In 2015-16, this increased UK public sector revenue by £6.9 billion and UK expenditure by £10.8 billion, resulting in a £3.9 billion increase in the UK net fiscal deficit. A similar impact is seen in earlier years. Scotland is apportioned none of this additional revenue or expenditure in GERS. The ONS have not yet announced a decision on the classification of Scottish Housing Associations."

8. I confess to being flummoxed by the fact that the non-identifiable cost totals in table A.1 are not explained by summing the figures given by spend category - see figures highlighted amber

Saturday, 5 November 2016

I've noticed there still seems to be a lot of confusion about the difference between the GERS deficit, the deficit gap between Scotland and the rest of the UK and the effective fiscal transfer that the rest of the UK currently makes to Scotland.

So here's a very simple exhibit which explains the difference between the £15bn1 GERS deficit for 2015-16 and the £9bn2 effective fiscal transfer Scotland receives from the rest of the UK. The effective fiscal transfer is as a result of the fact that we pool and share our deficit (hence debt, hence debt interest in GERS) on a UK-wide per capita basis.